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How to achieve superior returns with mid-market investments

For those operating in the European mid-market space, there is no shortage of deals to be done. And when it comes to generating superior returns, the more complex the deal (and ergo more risk) the better chance PE managers will have to create positive multiple arbitrage relative to the large-cap space. 

Of course, there is no magic formula to this, else everyone would be enjoying great success. But risk is critical; the smaller the company, the riskier the deal. 

At the lower end of the market where management is critical, the ability to attract superior talent is lower because of the size of the companies operating there. 

The mid-market can, however, provide PE groups with a good mix of quality management and an ability to attract talent. The management part of the equation is critical. Those who are open-minded and willing to transform their businesses can go some way to securing superior returns. 

Speaking last month at the International Private Equity Markets event ( in Cannes, Guillaume Jacqueau, Managing Partner of Equistone Partners Europe, commented that a combination of attracting talent on the one hand and having management agility within companies is often needed to create positive change. 

To illustrate the point, Jacqueau referred to one exit that Equistone realised last year. Meilleurtaux, a mid-market company that Equistone invested in in 2013, was a primary MBO, which it exited in February 2017, making an 8.2X earning multiple and generating a gross IRR of c. 70 per cent. 

During the 4-year investment period, Meilleurtaux has strengthened its position as a leading French financial products comparator and broker with a strong brand, a reference website and a network of 250 franchises. Equistone helped it to make five add-on acquisitions including: Online debt consolidation specialist, Préféo in January 2016, bank comparison website, Choisir-ma-banque in May 2014 and insurance comparison website,, in October 2016.

Now it is a money supermarket-type player that has been purchased by Goldman Sachs.

In order to succeed in the mid-market, PE sponsors have to trust in management teams and build synergies. Unlike the large-cap space, mid-market companies tend to be much more agile and can do build-ups and other things to reposition themselves in the market. This is much more complicated to do in large businesses. 

It requires excellent execution teams, however, to avoid getting things wrong.

The reality is that in the mid-market, most of the deals are not plain vanilla deals. Most deals are transactions where it is hard to use mezzanine financing alone. PE groups also need to commit equity. They are higher risk deals, but that is necessary to produce attractive returns. 
Francois Barbier is Deputy General Manager and Managing Partner at 21 Partners, who specialise in managing country-focused funds and who have 25 years of experience investing in the mid-market.  

He commented on the panel that to extract strategy value from an asset is not always easy. The size of the company is a critical factor, in terms of how one might succeed in transforming it.

This might involve moving a regional company to become a national company, or taking a national company to the European market for example. 

Sourcing the right deal is tricky given the level of competition in the market. The risk is that if someone pays a high price today will they be able to maintain that high price throughout the life of the investment? 

The panel all agreed that they had benefited from an increase in EBITDA multiples in various investments they had exited over the last 12 months. 

“Maybe that will stop and exit multiples will stabilise, which means that we have to increase the strategy value of our investments, which we are doing,” said Equistone’s Jacqueau. 

Applying laser focus on transforming a business remains absolutely necessary, perhaps even more so than in the past, as mid-market players look to benefit from positive multiple arbitrage. 

Transform the business and increase the strategy value: that was the key message coming across from the panel. 

They explained that despite low interest rates, which make it enticing to use debt to organise deals, leverage is not a primary lever to generate superior returns; rather it is the cherry on the top.

“The majority of our returns come from increasing the earnings multiples,” said 21 Partners’ Barbier.

One way to drive through transformation in a mid-market MBO deal is to work with external operating partners. This might be to help companies with logistics support, brand marketing support and so on. At 21 Partners, for example, they have chosen to develop a large network of experts who they can rely on at any time to implement changes in portfolio companies. 

Jacqueau said that it depends on a case-by-case basis. Some situations will absolutely require the use of operating partners, and in that sense Equistone is no exception. If used correctly, operating partners can help to put positive pressure on management teams and improve a company’s competitiveness in the market. But it will not be necessary all the time. Indeed, Jacqueau confirmed that Equistone did not use any external operating partners when doing the Meilleurtaux deal.

“When you use operating partners you have to be careful and explain to the management team why you are using them in order not to damage the relationship,” he said.

Even with a high level of performance, it is still a challenging fund raising environment for mid-market players. This might sound counterintuitive when one considers that last year, global private equity raised a record USD453 billion, surpassing the USD414 billion raised in 2007, according to the last figures released by Preqin. 

While LPs are ploughing money in, they are all too aware of the risk/reward ratio. They want to understand why a mid-market manager has been able to achieve good returns at the time of exit and that the general partners will be able to continue with this level of performance. It goes back to the old adage, ‘past performance is no indication of future returns’. 

Ultimately, one needs to be able to demonstrate to LPs that an active value creation process is in place to succeed in the mid-market space and compete with mega managers like Apollo, whose ninth fund vintage raised an eye popping USD24.6 billion in 2017: the largest PE fund launch.

With a buoyant deal pipeline, Europe’s mid-market continues to offer the right sort of opportunities for those willing to accept a higher risk to create positive multiple arbitrage, on an EBITDA basis, relative to the large-cap market segment where valuations continue to rise. 


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